PART 2: ARE ESG ASSETS OVERVALUED, AND HAS GREENWASHING DISTORTED MARKET CONFIDENCE?
Let’s see how you did – based on the research 👀
Assessing Valuations:
P/E
ratios are 20-30% higher for ESG firms than non-ESG firms. Their higher ESG
scores correlate with lower capital costs and increased profitability – so this could explain the greater valuation
premiums! Regulatory shifts, as well as investor
demand and risk mitigation are also likely contributors.
Critics argue that price pressure from passive fund flows artificially
inflates demand and for
every $1 in ESG inflows, market value rises by $0.70. But the same study explains
that this is not speculative mispricing, but rather a long-term repricing of
ESG assets - ESG is not overvalued. The paper goes on to project an annual
flow-driven ESG return of 2.07%, and show a structural change in capital
allocation toward ESG investments.
ESG’s
higher valuations are backed by institutional demand and long-term returns.
This supports a case for sustainability and distinguishes ESG from speculative
bubbles.
Market Resilience 👏:
In
the year 2022, ESG ETF drawdowns remained within 0.5% of the S&P, which
challenges claims of excess volatility. ESG funds continued to attract inflows
and reflect ongoing investor confidence despite political pushback. Although
there were outflows for some ESG funds, the overall resilience of ESG would signal
structural adoption over a passing trend.
Greenwashing and Market Confidence 🪴😎
Yes, it is true that inconsistent ESG ratings (with correlation coefficients ranging from 0.25 to 0.85) exposed flaws and temporarily weakened investor trust.
Source: Statista
Next week, we’ll test our claims even further – we’ll look at similarities between ESG investing and past financial bubbles.
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